Tapering: Mixed Reactions From Three Commodities…
Whew… what a week!
As I’m sure you’re aware, Federal Reserve Chairman Ben Bernanke announced the start of tapering on Wednesday.
In a rather surprising move, the US central bank will cut back on monthly economic stimulus starting in January. Most economists believed Bernanke would hold off on tapering until March 2014 at the earliest.
Going forward, the Fed will purchase $35 billion a month of mortgage-backed securities and $40 billion a month of longer-term treasuries. That’s a monthly reduction of $10 billion.
How are commodities reacting to the news?
Precious metals held their ground relatively well Wednesday after the news was announced. Gold fell a mere $11.90 and silver slipped 7 cents.
But yesterday was a completely different story. Gold plummeted $41 while silver swooned 82 cents- a rather hefty 3.3% and 4.1% drop respectively. More importantly, the dive has both metals on the verge of breaking extremely important technical support levels.
If gold can’t hold the $1,180 low set on June 28th, it opens the possibility of a freefall to $1,100. And if silver drops below $18, it could be the start of an eventual slide to $16.
While it may sound scary, this bout of weakness is likely temporary. After all, regardless of where inflation levels are, the average all-in cost for producing gold is around $1,250 an ounce. And for silver, it’s an estimated $25 an ounce.
That means these metals will eventually have to rebound above those levels.
And what about oil’s reaction to the tapering news?
Crude bulls are happy to hear the headlines because it means the US economy is gaining strength. And when the economy is strong, oil demand increases- sending the price higher.
As a matter of fact, West Texas Intermediate (WTI) is already nearing the $100 a barrel mark once again.
Take a look…
As you can see, after a steep selloff in October and November, WTI is back on the upswing. A recent run of bullish EIA inventory numbers, mixed with strong US economic data, has bulls in firm control of this market once again.
And remember…
The January 3rd start of a new pipeline running away from the Cushing, Oklahoma crude storage facility creates a bullish undertone for WTI. In the past, robust inventories at Cushing kept WTI priced substantially lower than Brent, the global crude benchmark.
As Cushing inventories fall in 2014, investors will likely erase the current $12 WTI discount to Brent. In other words, expect WTI to keep rising.
All things considered, the start of tapering is a great thing for commodities…
A strong US economy equates to rising commodity demand. And increasing demand will eventually lead to higher prices. Here at Commodity Trading Research, we believe overall commodity performance will be very strong in 2014!
Until Next Time,
Justin Bennett
